U.S. Bancorp CEO Discusses Q3 2010 Results - Earnings Call Transcript

Oct.20.10 | About: U.S. Bancorp (USB)

U.S. Bancorp (NYSE:USB)

Q3 2010 Earnings Conference Call

October 20, 2010 8:30 AM ET

Executives

Judith Murphy – IR

Richard Davis – Chairman, President and CEO

Andrew Cecere – Vice Chairman and CFO

Bill Parker – EVP and Chief Credit Officer

Analysts

Jon Arfstrom – RBC Capital Markets Corporation

Edward Najarian – ISI Group

John McDonald – Stanford Bernstein Research

Betsy Graseck – Morgan Stanley

Nancy Bush – NAB Research

Matthew O’Connor – Deutsche Bank AG

Heather Wolf – UBS Securities

Paul Miller – FBR Capital Markets

Michael Mayo – CLSA

David Konrad – Keefe, Bruyette, & Woods, Inc.

Matthew Burnell – Wells Fargo Securities, LLC

Meredith Whitney – Meredith Whitney Advisory Group

Operator

Welcome to U.S. Bancorp’s Third Quarter 2010 Earnings Conference Call. Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer; and Andy Cecere, U.S. Bancorp’s Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session.

(Operator Instructions) I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Judith Murphy

Thank you, Brandy, and good morning to everyone, who has joined our call today. Richard Davis, Andy Cecere and Bill Parker are here with me today to review U.S. Bancorp’s Third Quarter 2010 Results and to answer your questions. Richard and Andy will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation, as well as our earnings release and supplemental analysts’ schedules, are available on our website at usbank.com.

I would like to remind you that any forward-looking statements made during today’s call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on page two of today’s presentation in our press release and in our Form 10-K and subsequent reports on file with the SEC.

I will now turn the call over to Richard.

Richard Davis

Thank you, Judy, and good morning, everyone, and thank you for joining us. I’d like to begin on page three of the presentation and review a few of the highlights of our quarterly results.

U.S. Bancorp reported net income of $908 million for the third quarter of 2010 or $0.45 per diluted common share. Earnings were $0.15 higher than the same quarter of last year and equal to the second quarter of 2010.

We achieved record total net revenue of $4.6 billion in the third quarter. This represented a 7.9% increase over the same quarter of 2009 and a 1.5 % increase over the prior quarter.

Total average loans grew year-over-year by 5.8%, benefiting from recent acquisitions. Excluding acquisitions, average loans were down slightly from last year. Importantly, however, on a length quarter basis, average total loans grew by 0.7%.

We continue to post strong year-over-year average deposit growth, particularly in the low cost categories, including non-interest bearing, interest checking, money market and savings. These categories grew on average 13.6% year-over-year or 9% excluding acquisitions.

Once again credit quality improved quarter-over-quarter as net charge-offs and nonperforming assets, excluding covered assets declined by 10.7% and 4.6% respectively from the second quarter.

Our capital position remains strong and growing with the Tier 1 common ratio and the Tier 1 capital ratio increasing to 7.6% and 10.3%, respectively, at September 30th.

Slide four graphs our performance metrics over the past five quarters. Return on average assets in the third quarter was 1.26%, and return on average common equity was 12.8%. The five quarter trends of our net interest margin and efficiency ratio are shown in the graph on the right-hand of the slide four.

This quarter’s net interest margin of 3.91% was just slightly higher than the prior quarter and 24 basis points higher than the same quarter of 2009.

Our third quarter efficiency ratio was 51.9%, slightly lower than the prior quarter, but above the same quarter of last year.

We remain the best among our peers in terms of efficiency and the increase in this ratio reflects both ongoing investments and the impact of recent legislative and regulatory actions on revenue and on expense.

Turning to slide five. Our capital position remains strong and continuous to grow. Additionally, our tangible common equity to tangible assets ratio rose from 5.4% at September 30th, 2009, to 6.2% at September 30th, 2010.

Our company continues to generate significant capital each quarter due to the momentum in our diverse business mix in addition to our superior efficiency and our ongoing profitability.

As I’ve said before, we are confident that our capital levels and our ability to generate new capital each quarter can support a dividend increase and allow us to meet or exceed any capital requirements that maybe forth coming.

Increasing the dividend remains a top priority for our management team and our Board of Directors, though we must continue to wait for final regulatory capital guidelines to be established and regulatory approval to be given before a dividend action can be taken. We fully expect, however, to be one of the first banks to raise our dividend once those guidelines have been determined.

Moving on to slide six. Average total loans outstanding increased by over $10 billion year-over-year. But as noted on the slide, excluding acquisitions, total average loans declined by 0.4% year-over-year as the average commitment utilization rate by our commercial and corporate borrowers declined from 32% in the third quarter of 2009 to 26% in the third of this year.

On a linked to quarter basis, however, total loans increased by 0.7% as we experienced slightly higher demand for new loans from creditworthy borrowers and as the average utilization rate on commitments stabilize albeit at a historically low level.

Notably, we recorded an increase in average commercial loans outstanding quarter-over-quarter. This is the first linked quarter increase since the fourth quarter of 2008.

At September 30th, total loans were approximately $3 billion higher than at June 30th. Again, signifying that we are seeing some improvement in loan demand coupled with an ongoing flight to quality as we continue to originate and renew lines and loans for our qualified customers, who want and who need credit.

In fact, during the third of 2010, U.S. Bank originated over $16.5 billion of residential mortgages, originated almost $6 billion of other consumer loans, including installment loans, student loans, lines of credit and home equity lines and loans. We originated new prime-based credit card accounts with lines totaling $1.4 billion, and we issued $12 billion of new commitments and renewed almost $19 billion of commitments to small businesses, commercial and commercial real estate customers.

Overall, excluding mortgage production, new originations plus new and renewed commitments total approximately $38 billion, about $2 billion higher than the previous quarter’s total.

Total average deposits increased by $15.3 billion or 9.8% over the same quarter of last year. Excluding acquisitions, the growth rate was 2.7% year-over-year. Total average deposits decline by $658 million on a linked to quarter basis primarily due to lower corporate trust, institutional trust and broker dealer deposits.

Turning to slide seven. The company reported record total net revenue in the third quarter of $4.6 billion. The growth in revenue was driven by earning asset growth and expanding net interest margin, strength in our fee-based businesses, organic growth initiatives and acquisitions all tempered by the impact of recent legislative actions.

Turning to slide eight and credit quality. Third quarter total net charge-offs of $995 million were 10.7% lower than the second quarter of 2010. Nonperforming assets, excluding covered assets, decreased by $171 million or 4.6%.

On slide nine, you can see the early and late stage delinquencies excluding covered assets, improved again this quarter. The decrease in net charge-offs and nonperforming assets in addition to the favorable changes and early and late stage delinquencies and as detailed on the right-hand side of slide nine, the continuing favorable trend in criticized assets all indicate that we have reached the inflection point in credit quality.

Accordingly, we expect the level of both net charge-offs and nonperforming assets, excluding covered assets to continue to decline in the fourth quarter.

Turning to slide 10. You can see that this is the first reporting period since the fourth quarter of 2007 that we have not recorded an incremental provision for loan losses. This compares with an incremental provision equal to approximately 2% of net charge-offs in the second quarter of 2010, and approximately 40% of net charge-offs in the third quarter of 2009.

Despite this positive trend in credit quality, we did not release reserves this quarter. Contrary to some of our peers, our loan portfolio and particularly a number of consumer loan categories has grown, and the economy, although showing some signs of stability continues to be uncertain with high unemployment and a very challenging real estate market.

We entered this cycle with a strong and resilient balance sheet and we intend to protect that position going forward. Maintaining reserve levels commensurate with the growth and changing risk of our loan portfolio is an integral part of that effort. You will find additional credit information on all of the major loan categories in the appendix of this slide presentation.

Finally, I wanted to address concerns about the validity of our foreclosure process and calls by many for a national moratorium. Our company’s primary goal is to keep borrowers in their homes whenever possible. U.S. Bank participates in a number of loan modification programs including HAMP, which established affordable payment options for our customers.

In addition, we have developed and implemented other foreclosure prevention methods that include early contact with delinquent borrowers, marketing outreach programs and participation of foreclosure provision workshops.

In fact, since 2007, the U.S. Bank has modified over 34,000 loans with mortgage balances, outstanding of approximately $8.2 billion. The manageable size and quality of our portfolio allow us to manage the foreclosure process internally. Recall that U.S. Bank did not participate in the large scale origination and/or securitization of sub-prime or questionable loan structures.

The foreclosure process that U.S. Bank follows well-established safeguards including both individual and committee review of each loan file to ensure that the foreclosure documentation is accurate. We routinely review our policies and procedures and we have just reassessed and reconfirmed the quality of our processes and controls. We will continue to review our processes going forward and comply with any information request we receive from our regulators or other government officials.

We do not however have plans to halt foreclosures and we believe that any blanket foreclosure moratorium will seriously impair the national economic recovery.

Before leaving this topic, I’d like to spend a moment on discussing U.S. Bank’s role as Trustee for mortgage securities as our company is referenced from time to time erroneously as having certain responsibilities with respect to transactions, where in fact our role is limited to very specific duties outlined in the documents that established the trust.

As Trustee, U.S. Bank did not have a role in the servicing of mortgages that are used as collateral in the trust. As Trustee, we do not select the service of the mortgages or have a role in the actions the servicer takes in the foreclosure process. Further, as Trustee and/or Custodian, we do not have responsibility for determining the validity or enforceability of the underlying mortgage documents. That is the role of securitization sponsor.

I will now turn the call over to Andy.

Andrew Cecere

Thanks, Richard. I will take just a few minutes to provide you with a few more details about the results. I turn your attention to slide 12, which gives a full view of our third quarter 2010 results compared to those recorded in the second quarter of 2010 and the third quarter of 2009.

Earnings per diluted common share were $0.45 for the third quarter 2010, equal to the prior quarter and $0.15 higher than the third quarter of 2009. The key drivers of the company’s third quarter results are detailed on slide 13.

The $305 million or 50.6% increase in net income year-over-year was primary the result of an 7.9% increase in net revenue and a $461 million decrease in the provision for credit losses, which was comprise of $46 million favorable variance in net charge-offs and a $415 million decrease in incremental provision expense. These favorable changes in total revenue and the provision were partially offset by a 16.2% increase in non-interest expense year-over-year.

Net income was $142 million or 18.5% higher on a linked-quarter basis, a 1.5% growth in total net revenue and a favorable variance of $144 million in the provision for loan losses more than offset the slight increase in non-interest expense quarter-over-quarter.

A summary of the significant items that impact the comparison of our third quarter results to prior periods are detailed on slide 14.

The only significant item called off for the third quarter of 2010 were net securities losses of $9 million, not large enough to have an impact on the company’s EPS.

Earnings per diluted common share in the second quarter of 2010 included a $0.05 benefit related to the nonrecurring exchange of perpetual preferred stock for outstanding income trust securities. Other smaller items are listed for your review on this slide.

Significant items impacting the third quarter of 2009 are also highlighted on slide 14. The largest item of which was a $415 million incremental provision expense.

Turning to slide 15. Net interest income increased year-over-year by $320 million or 14.8% due to a $17.8 billion increase in average earning assets and an expanded net interest margin. The increase in average earning assets was primarily acquisition related.

The net interest margin was 24 basis points higher than the third quarter of 2009, primarily to growth and low cost deposits, lower funding rates and improved credit spreads.

On a linked-quarter basis, net interest income was higher by $68 million, the result of both an increase in average earning assets slightly higher margin and day basis. The net interest margin was higher by just one basis point over the prior quarter as lower funding costs were partially offset by the incremental impact of the CARD Act. Assuming the current rate environment and yield curve, we expect net interest margin to decline by five to 10 basis points in the fourth quarter of 2010 due to the CARD Act and lower long-term rates.

Slide 16 provides you with more detail on the change in average total loans outstanding. Average total loans grew by $10.6 billion or 5.8% year-over-year. Excluding acquisitions, average total loans declined by 0.4% and as you can see from the chart in the left; this decline was driven by an 8.7% year-over-year decrease in average commercial loans outstanding.

As Richard pointed out, the reduction in commercial and corporate lending year-over-year was primarily due to the utilization rate, which has declined from 32% in the third quarter of 2009 to 26% in the current quarter representing a decrease in excess of $3 billion.

Covered loans, which grew by $9 billion year-over-year represent loans acquired through the FDIC-assisted transactions and include Downey, PFF and the banking operations of FBOP. The latter of which was acquired in October 31st of 2009.

On the linked-quarter basis, the 0.7% increase in average loans outstanding was driven by increase in commercial loans, residential mortgage and total retail loans.

Moving to slide 17. You can see the growth and total low-cost core deposits over the past five quarters. Average total deposits grew by $16.3 billion or 9.8% year-over-year partially due to acquisitions. Notably, low-cost core deposits, non-interest-bearing, interest checking, money market and savings, excluding acquisitions, grew by 9%. On a linked-quarter basis, average deposits decreased slightly, principally due to corporate and institutional customer activity, which was partially offset by low-cost deposit growth in the consumer bank.

Slide 18 represents in more detail the changes in non-interest income on a year-over-year and linked-quarter basis. Non-interest income in the third quarter of 2010 was $70 million or 0.8% higher than the third quarter of 2009, this variance by growth in payments, commercial products and mortgage banking revenue. These favorable variances were partially offset by lower deposit service charges, which reflected the legislative and bank developed pricing changes and lower trust in investment management fees.

On a linked-quarter basis, non-interest income was flat. Payments related revenue grew by 2.5% driven by seasonally higher transaction volumes and mortgage banking increased by $67 million driven by record high production volume and net securities losses were favorable. These positive items were offset by reductions in deposit service charges, the results as changes in overdraft policies and pricing, the Visa gain recorded in the second quarter of 2010 and a number of smaller variance in the other fee income accounts.

Acquisitions had a minimal impact on the variance in fee revenue on a year-over-year or linked-quarter basis.

Slide 19 highlights non-interest expense, which was higher year-over-year by $332 million or 16.2%. The majority of the increase can be attributed to acquisitions, which accounted for $85 million of the increase, higher compensation and benefits expense driven by incentives, merit increase and the restoration of the 5% salary reductions taken as part of our cost savings programs in 2009 and additional staffing.

Higher cost related to investments and tax advantage projects accounted for $22 million of the increase, an increase in professional services expense, and technology and communication expense related to investments and projects and high ORE expense, which will remain at the current levels as we aggressive manage the disposition of our ORE properties.

On a linked-quarter basis, non-interest expense was higher by just $8 million or 0.3%.

Finally, the tax rate on an equivalent basis was 25.9% in the third quarter of 2010, compared to 25% in the second quarter of 2010, compared to 25% in the second quarter of 2010 and 18.4% in the third quarter of 2009.

Given the heightened focus on mortgage foreclosure and repurchases, we have provided more detail in the company’s mortgage, repurchased related expense and the reserve or expected losses on repurchases and make whole payments on slide 20. We have also added this information to the supplemental financial data schedule attached to our quarterly earnings release.

As indicated on the table on the left-hand side of the slide, are any reserve was $147 million at September 30th, and the addition to the reserve in the third quarter of 2010 was $70 million. This $70 million repurchased expense was booked as a contra [ph] revenue item in the mortgage banking fee income line.

Mortgages repurchased and make whole payments in the third quarter totaled $53 million. Our company’s conservative credit underwriting culture as well as our very disciplined loan origination process has resulted in lower repurchase volumes and expense relative to our peers.

Given the current environment, we expect repurchase activity to remain slightly elevated over the next few quarters before beginning a moderate downward with quarterly repurchases expense of $50 to 70 million per quarter and any reserve levels of between $150 and 175 million.

On slide 21, we have listed the two regulatory changes that have and will have an impact in our results and we wanted to give you a brief update, revenue assumptions related to these changes. We estimate that overdraft pricing and policy changes have reduced revenue year-to-date 2010 by approximately $140 million and we’ll reduce revenue by an additional $110 to 120 million in the fourth quarter bringing our full year 2010 estimate to between $250 and $260 million.

The annual run rate going forward is expected to be $440 to $480 million. This is slightly lower than our previous estimate and does not include any mitigating actions. Overall, our opt-in rate has been higher than expected. But our pricing changes are lower than anticipated; number of overdraft incidences keeps us from materially changing our estimates.

The CARD Act has reduced total revenue year-to-date by approximately $100 million and is expected to reduce revenue by approximately $60 to 80 million in the fourth quarter of 2010. We expect the total 2000 revenue impact to be in the range of $160 to 180 million with an annual run rate going forward or approximately $250 million.

Finally, turning to slide 22, an update on the impact of Basel III. We originally presented this analysis at our Investor Day in September and we have now the numbers as of September 30th and the numbers have not changed materially. The impact of limits for mortgage servicing rights, deferred tax assets and investment of financial institutions remains at zero.

The impact of the deduction for the pension liability, purchased credit card relationship intangibles and all others equals 38 basis points, while the changes related to our non-core capital elements are trust preferreds, net or replacement capital requirements is equal to 45 basis points. All of this translates to a pro forma Tier 1 common equity ratio as of September 30th of 7.2% and a Tier 1 ratio of 9.4%.

On a pro forma basis, this puts us above the Tier 1 common equity target of 7%, the Basel III level required in the year 2019.

However, two items remain uncertain. First, the implementation timetable of the counter cyclical component of capital remains uncertain, and second, the systemic rib buffer has yet to be defined. Regardless, we have the capital we need today and we continue to generate significant capital each and every quarter. So, I’m very satisfied that we can manage our capital requirements going forward.

Moving to the right side, hand side of the slide, I would say first that our – and foremost that our liquidity has never been stronger. There is still a number of unknowns in regard to how Basel III will be implemented. Given the strength of our balance sheet and our ability to generate deposits and liquidity, we feel any change will be manageable and we have already have a number of initiatives underway to ensure that we are prepared.

I will now turn the call back to Richard.

Richard Davis

Thanks, Andy. To include our formal remarks, I turn your attention to slide 23.

On September 15th, we held an Investor Day in New York City. The theme of the day was Position to Win. Our presentation has highlighted our strong foundation including our ability to manage credit and risk, our diversified business mix and our prudent capital management.

We discussed how we have proven our ability to perform even during one of the most challenging and uncertain economic cycles. We talked about how we have invested in our business line and as a result are building profitable scale and growing our market share.

Our third results fully support our belief that U.S. Bancorp is operating from a position of strength and remains position to win. We are moving forward with optimism despite the headwinds of new regulatory and legislative actions and oversight and still an uncertain economy. We are focused on the future and we are ready and willing to do what we can to support the economic recovery of this country. We’re also standing our engaged – engaged and performance-driven workforce in creating superior value for our shareholders.

That concludes our formal remarks. Andy, Bill and I would be happy to answer questions from the audience.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jon Arfstrom with RBC Capital Market.

Richard Davis

Good morning, John.

Andrew Cecere

Hey, John.

Jon Arfstrom – RBC Capital Markets Corporation

Thanks. Good morning. A couple of questions for you on lending – particularly commercial and can you talk a little bit about where that growth is coming from if that’s part of your national initiative or the small business initiative that you have. Just give us an idea of where that demand is coming from.

Richard Davis

So, John, this is Richard. I’ll start and I’ll ask Bill Parker to chime in. We’re seeing it across the board slowly, just a little bit and just about everywhere. So, what we’re seeing is the qualified customers are now starting to come back into the marketplace as you think about the most qualified are the ones who least needed to use our balance sheet to grow their companies and are starting now to see enough reason to incur some debt and to develop some inventory consider some investments.

So, on the corporate banking side, as you know we’ve continued to enjoy some growth there. But these customers who got a very strong capital market to use as well and in some cases, they’re now using both the capital markets and the bank balance sheet and we’re starting to see some growth there. It’s probably our most important growth, comes from the commercial banking middle market area, where we’re seeing continued slow, but steady increases across the entire geography.

We currently see stress in entertainment and gaming sections as you would expect and then, all of our areas, where we have appraisals for owner occupied real estate. They continue to reflect decreasing values and there are some continued stress in all those areas as you would expect.

Community banking is steady as it always has been, and agriculture looks to be very solid this year with a little overproduction being offset by higher commodity prices. And finally, small business continue to be very strong for us not only because we’re starting to see a new lift in a number of small businesses getting to a point, where they’re strong enough now to incur some debt.

But a couple of years ago, we placed a full court press on becoming more involved in small business lending from traditional to SBA to small ticket leasing and those benefits are starting to yield results by the hundreds of new employees we put in place and the back offices we created to do a better job at small lending. So, for us, it’s a lot of a little bit everywhere and a little bit of our good work a few years ago, starting to come into fruition.

So, Bill, you might add to that?

Bill Parker

Yes, I’ll start with small business. I mean I was up about 1% just in the quarter, second quarter to third quarter, and that’s pretty much across the board whether it was SBA or the loan, small business loans originated out of our branches. We’ve had fairly steady growth in that area the last several quarters.

And then on the corporate middle market side, we have a strong emphasis on leading credits. We’ve been able to successfully gain some market share in those areas. So, we’ve seen pretty good loan demand here in the last quarter.

Richard Davis

You got more than one question, John?

Jon Arfstrom – RBC Capital Markets Corporation

Yes, just the next question is more of a – just changing the retail. Obviously, you’ve highlighted your Reg E issue and we have that will show off at some point. But how do you think about the retail checking product, some of your larger competitors have made some changes in terms of the account structure and just curios what you’re thinking is. Is it higher minimum? Is it monthly piece, you know how do you get paid for your retail branch network.

Richard Davis

Thank you, John. First of all, you know to our competitors, go forth. We’re going to wait and I think after this last time, we, I think, have the luxury and we’ve earned the positioned to watch and learn. I have no idea what’s the customer going to want at this next range, and I’m not going to say we’re going to get it all back without knowing what that means.

We have to have a value proposition. We have to have a relationship that’s got more than a transaction account attached to it. We’re building all those preparations. But I’ll say, I think it’s going to be a monthly service charge, but I think it’s going to be for more than the standard checking account.

I think people will be able to offset any of those charges like having deeper relationships and different value transactions with the company, but I am not going to move on that quickly. We’re going to – I think I said this last time, we’ll withhold some near-term earnings by not jumping into freight early, by taking a little longer to learn what the right answer is, perhaps take some market share while people are adjusting more quickly to figure out the right answer and then, we’ll deliver something to you all when we have a better idea of what this next generation of checking pricing looks like.

Jon Arfstrom – RBC Capital Markets Corporation

Okay, thank you.

Richard Davis

Yes.

Operator

Your next question comes from the line of Ed Najarian with ISI Group.

Richard Davis

Hi, Ed.

Andrew Cecere

Hi, Ed.

Edward Najarian – ISI Group

Good morning, guys. I was just wondering if you I could flip you back to page 21.

Richard Davis

Yes.

Edward Najarian – ISI Group

And I guess I just didn’t quite understand exactly what you were saying on that page in terms of the impact, if you could just go through that quickly one more time.

Andrew Cecere

Sure. This is the regulatory environment, Ed?

Edward Najarian – ISI Group

Yes.

Richard Davis

Yes.

Edward Najarian – ISI Group

The terms.

Andrew Cecere

Yes. So, you know, both CARD Act and the overdraft Reg E changes had been slowly impacting us more and more, each and every quarter of 2010. I would say we’re getting to the full run rate in the fourth quarter. So, we were not at the full run rate in the third quarter and certainly, not in the first half of the year, so that 110 and 120 represents the full run rate and four times that amount is what you see for next year –

Edward Najarian – ISI Group

The full run rate of the negative revenue impact on a free tax basis.

Andrew Cecere

That is correct, Ed.

Edward Najarian – ISI Group

OK.

Andrew Cecere

And that is correct for both the overdraft and the CARD Act impact, and the CARD Act is both in fee income and in net interest margin.

Edward Najarian – ISI Group

Right, okay. So, this is a revenue – sort of a lost revenue estimate on a pre-taxed basis based on these regulatory actions.

Richard Davis

That is correct.

Andrew Cecere

That’s right. Another great thing is quarter four is finally hitting stride multiply, kind of by four and you’re kind of there without the mitigating discussion that we had John a minute ago.

Edward Najarian – ISI Group

Okay. And then next question would be with respect to the net interest margin outlook for the fourth quarter down to five to 10 basis points. Obviously, we saw good stability and good net interest income growth. This quarter, you indicated it was below rate backdrop. Could you put a little more color around that and would you expect it to stabilize subsequent to 4Q or is this the beginning of a – a bit of a NIM compression trend.

Andrew Cecere

Well, there are two key factors that are driving the fourth quarter. One is what you just asked about, which is the full impact of CARD Act on our credit card rates and yields in the fourth quarter will be fully baked in so to speak, and that’s going to cause a bit of that compression.

The second item as you know long rates are down versus where we were in the first half of the year and that has a negative impact on both our securities portfolio and other earning assets. So, those are the two key drivers. Those are what’s causing the five to 10-basis point declines in the fourth quarter, depending upon what happens with long rates in 2011.

You know I don’t know how that will look, but as we see today and what the yield curve looks like today, that’s what the impact is. If it doesn’t change a lot that in fact will be relatively stable. If the yield curve changes, that will adjust.

Edward Najarian – ISI Group

[Inaudible].

Richard Davis

Yes, we’re not trying to guess beyond quarter four, and we’re just trying to say show you what moves.

Edward Najarian – ISI Group

Right. But I mean when you say be relatively stable, and if the interest rates remain stable, you mean it will get down to that level, but not –potentially not compress a lot further than that or when you say relatively stable you mean –

Andrew Cecere

[Inaudible].

Edward Najarian – ISI Group

Ongoing down at that phase?

Andrew Cecere

Yes, had we been fairly consistent in trying to lock out 90 days because there was so many moving parts with margin. I would say relatively stable, given what I know today about the yield curve and about rates. But there are a lot of moving parts there and we’ll be sure to update you every quarter like we’ve been doing.

Edward Najarian – ISI Group

Okay. And then last question, obviously, very strong mortgage origination revenue this quarter. Do you care to make any comments on your outlook for mortgage origination volume or revenue?

Andrew Cecere

Sure. So, Ed, we had about $16.5 billion of production, a record quarter over $20 billion of house, so another record. So, it was a tremendous quarter given the low rate environment.

The hedge was neutral, so that we didn’t benefit at all from the hedge. And you know as you compare it on a year-over-year basis year ago, we’ve actually made about $67 million on that. I would expect the third quarter to be down somewhat – I mean excuse me; the fourth quarter will be down somewhat just given the seasonality in the mortgage business.

Edward Najarian – ISI Group

Okay, great. Thank you very much.

Andrew Cecere

You bet.

Operator

Your next question comes from the line of John McDonald with Stanford Bernstein.

Richard Davis

Good morning, John.

Andrew Cecere

Hey, John.

John McDonald – Stanford Bernstein Research

Hi, good morning, guys. Andy, just on expenses, if you could comment – give an outlook on expenses, if we’d kind of think X the FDIC expense increase that you discussed coming on next year. Is this quarter kind of a good runway on expenses? Do you have any other kind of puts and takes to mention going forward that we should think about on expenses?

Andrew Cecere

Right. So, you know, John, when we talked a little bit about this last quarter and I said that the third quarter was a pretty good rate and our second quarter was a pretty good run rate for the third quarter and it ended up being that way. We’re up $8 million. So, I would say that we have most of the components included.

I think a couple of the unknowns are certainly as you mentioned, the FDIC expense you saw yesterday that the three basis point increase is no longer part of the equation. But the equation is still uncertain and the exact rates are still uncertain, so that’s a factor.

The fourth quarter is seasonally higher with our CDIC or tax credit related expense, so that will be up a little bit. But I don’t see any other material changes.

John McDonald – Stanford Bernstein Research

Okay. And Richard, you touched on the reserve release or the lack of reserve release compared to some of the peers. So, just anymore color on kind of what factors will drive whether U.S. Bank has any kind of recapture of reserves over the next couple of quarters as credit continues to improve.

Richard Davis

Yes, John. I think – as I said, you know, all the other quarters, it’s a lot more mass than it is ours. So, we let the mass dictate where we are and I have to say that if we continue to see progression in our delinquency improvements and our nonperforming outsets, we will probably see a reserve release in the future quarters.

As I also said about a year ago, if we end up doing that, it’s because we failed in our ability to predict perfectly and that will be the case. But I don’t think [inaudible] at this situation today. We don’t ever put it away with the goal of getting it back later. We simply put it away based on the math of what we see in the current day.

As Bill would tell you, particularly consumer loans are based on a four quarter full review. Commercial loans are a little more lumpy and more individual based on company and in bold cases, they’re coming down. But I also want to make sure that we end this cycle with very, very strong reserve levels – adequate and strong reserve levels for our loan offices as we go into the improving scenario. So, I think that if we keep following the map like we have, you’ll start to see some reserve capture, but it won’t be significant and it wasn’t intentional.

John McDonald – Stanford Bernstein Research

Okay, great. Thank you.

Richard Davis

Yes.

Andrew Cecere

Thanks.

Operator

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Betsy Graseck – Morgan Stanley

Hi, question just on the liability management side. When we talked about NIM compression, what you know could happen with the long end of the curve coming down. But maybe give us some color as to how you are healing the liability side, opportunities to bring down your cost of funding there and maybe you could speak a little bit to the possibility – yes or no of troughs redemption.

Andrew Cecere

So, a couple of things. We issued two – we had two debt issuances in the last few months, both at the lowest rate ever issued by a bank holding company in the U.S. to five-year paper and three-year. And I will tell you that we don’t have a lot more issuance plan for the remainder of the year and we don’t have a lot rolling off in 2011.

Secondly, we have been growing deposit as you’ve seen, low-cost core retail deposits which is helpful in terms of our funding cost and we will have the second component or the second half of the it’s transaction that occurs late first quarter, early second quarter of 2011. Those are the key components. We’re watching on the further redemption in terms of the rules around what counts as capital, but we have no plans to do an early exchange right now.

Richard Davis

And that’s it Richard, let me just say, I’ve instructed our team to be aggressive on deposit gathering. So, while you’re hearing that there’s going to be a growth of long growth, I ask you believe that we’re going to continue to grow based on market share grab. I’m going to make that assumption and therefore, we’re going to keep going to deposits and I think whichever bank ends this downturn goes into the recovery with the most customers, with the most deposits especially cored deposits will end up winning the next cycle. So, we’re not backing down. We have the ability to be aggressive in the deposit pricing based on relationships and we’re doing it across the board.

Betsy Graseck – Morgan Stanley

Don’t you agree the loan growth is not as significant as the funding side? It does give you some room to bring down the higher cost that you’ve got on your balance sheet.

Richard Davis

Yes, I think also, Betsy, it may lead us to build our securities portfolio a bit, not material, but a bit as we continue to build our liquidity coverage ratio and strengthen our liquidity on balance sheet.

Betsy Graseck – Morgan Stanley

All right, thank you.

Richard Davis

Sure, thanks.

Operator

Your next question comes from the line of Nancy Bush with NAB Research.

Nancy Bush – NAB Research

Good morning, guys.

Richard Davis

Hi, Nancy.

Andrew Cecere

Hi.

Nancy Bush – NAB Research

Okay. I realized that asking this question will be an exercise in futility, but I need to ask it anyway.

Richard Davis

Go for it.

Nancy Bush – NAB Research

Okay, a dividend question.

Richard Davis

Yes.

Nancy Bush – NAB Research

You had said that you would like to pay the dividend or grow the dividend the first possibly opportunity. Jamie Dimon has said the same thing. Vikram Pandit had said don’t expect anything in 2011.

Do you have any sense, Richard, of whether the regulators are going to sign off on the resumption of dividend growth, wholesale for the industry as they did with the cuts or they’re going to look at it company by company and maybe awhile some in 2011 and postpone the rest until later?

Richard Davis

Okay. So, this is – you set it up and I’ll confirm. This is just my opinion and based on the data I collect, I think that it’ll be the latter or the former. I think they’re going to allow banks individually with permission to move forward on dividend resumption and/or stock buybacks.

Here’s my current, in my head, the timeline looks like this. G20 Heads of State meet in the end of November. They confirm what the finance ministers have said all along. They confirm the capital levels, then they leave to the domestic local domains to decide what kind of systemic important capital, buffer there maybe, and other things that each country may want to add.

Once and when our government and our Fed and Treasury have decided what that is for our banks, I think they’ll continue to pursue this stress testing that we have all been under and that we’ve all been pursuing for quite some time, along with our capital plans and our liquidity plans. And if and when we can attach all of those acceptable actions to their requirements and we meet the test of the capital levels, then I think banks, as they find themselves satisfying those measures, will get out.

And I think – I hope that’s the case because I would hate that we have to wait for the lowest common denominator. And I also think it would be prudent for a lot of reasons for the recovery of this economy to allow banks significant dividend payers to give their shareholders what they’ve been waiting for, for a long time. So, I’m going to stick with what I believe, because it serves us well to believe that will be the case. And we’re operating on the basis that each of us will get out as we have permission and as we have earned it and we’re working hard to earn it.

Nancy Bush – NAB Research

Secondly, could you just – I’m assuming you were at the dinner with Elizabeth Warren on this topic of how she was going to structure her bureau going forward, et cetera. Do you have any greater insight into how that’s going to occur and what we should be looking at in terms of timing for product requirements, et cetera?

Richard Davis

Yes, with the same disclaimer I gave a second ago. And in fact, I introduced her at that dinner in my role at the roundtable and had breakfast with her the morning of. And I’m quite comfortable that her first most important activity as she builds the agencies, she’s not running it, is to focus almost exclusively on disclosures, transparency and simplicity. As she has made clear to everybody that night, she’s made it clear to a few of us even since then so.

So, first and foremost, the Consumer Protection Bureau as it’s beginning to become an agency is going to focus on clarity and simplicity of transparency communications and disclosures. We all welcome that, by the way, because we need a Safe Harbor to help us create these more simplified, easier to understand protocols when, in fact, we have so many issues on a legal side, that if we don’t put everything in the 25-page document, we’ll find ourselves in harm’s way. So, I’m looking forward to that as her first effort.

I think, as you probably know what I know, the responsibility for that agency to be up and running isn’t until mid-2011; at which point I believe they’ll have the key players and they have the key mandate, which will then follow some of the rule-making that we’re all going to be eager to get. But I think that’s a mid-2011, so little come out of it beyond disclosures in the next couple of quarters. That’s my thought.

Nancy Bush – NAB Research

Thank you.

Richard Davis

Yes.

Operator

Your next question comes from the line of Matt O’Connor with Deutsche Bank.

Matthew O’Connor – Deutsche Bank AG

Hi.

Richard Davis

Good morning, Matt.

Matthew O’Connor – Deutsche Bank AG

I just wanted to get your take on the Mortgage Origination business at this point. You’ve got a pretty good track record when it comes to this.

During the bubble years, you weren’t a big player and that helped you avoid a lot of the issues others are facing or have faced and are facing now. And then you’ve been gaining share in the last couple of years, which I think has proven to be pretty profitable. So, a lot of the noise out there relates to previous originations, but there’s just – in general I think a lot of uncertainty in terms of the prophesies going forward and what spreads will looked like. And I’m just wondering what your take is on the business overall, and remind us how you think of retail versus wholesale channels.

Richard Davis

Okay. I’ll go first, and then Andy can talk about spreads. This is Richard.

We like the business as much as we did a couple of years ago, when we decided to stave off and more than double our investment in it. We were in the high teens as an originator and servicer a couple of years ago, and now we’re four or five, five or six. Sadly, it’s not just because we’re so amazing. It’s because so many between us have moved on or consolidated, so it’s a little both.

What I like about though is we haven’t left our old-fashioned approach of doing it very, very close to the customer. We have six locations across the country, where we take care of our mortgage business. They’re in large centers, which are handled by very, very capable people. And when we added to our business, we didn’t add any new locations, we didn’t add any new capabilities, we just added more people under the current management to do twice as much work.

So, I’m very comfortable with our approach. It’s a low-cost approach. We have our largest centers in places like Oshkosh, Wisconsin and Nevada, Missouri and Owensboro, Kentucky. So, we have a great workforce and then a great cost of doing business, and we’re just going to continue to grow at those points.

Right now, we’re operating, as you know, on a significantly higher refi market than origination market. That will serve all of us well to keep people busy for a while. But I think that when the recovery finally attaches itself, and probably a couple of years from now on the mortgage side, you’ll start to see the old-fashioned originations outtake the refinances. And we’ll be ready for that as well.

The mix can be a little bit different based on refi versus origination, but we’re prepared for both of those. And then, Matt, we also have a pretty good wholesale business. And we have not gotten out of all the broker businesses, because we weren’t in any broker businesses we didn’t like. Some of our peers are moving away from that.

And like everything else, we are staying with the old-fashioned way of the way we did it in the first place. And Wholesale does have a pretty good volume stream that kind of mitigate some of the peaks and flows that what would otherwise happen in the retail side, although the margins are a little bit skinnier.

So, we’re a very blended, very basic mortgage business, just bigger than we were before. And frankly, we’re going to keep investing in it because we think that, again, at the recovery point, he whoever has the most critical mass, whether customers or not being outsourced to anybody else to accomplish those needs, are going to be better off. That’s the kind of the growth side. Andy, you might talk about the margins.

Andrew Cecere

Yes, on the margin side. Matt, again on sale margins are probably a little higher than what would be normal in this environment, maybe 125 or 150. They probably will moderate down a bit, maybe 100 to 125, but it’s still be a profitable and well-run business for us.

Matthew O’Connor – Deutsche Bank AG

Okay. I mean, just as a follow-up here. I guess, as you think about the servicing side of the business, does not need to be repriced, given just the general higher risk? And what seems to be the higher cost of just the overall responsibility in that business?

Richard Davis

Well, I think that as we tried to demonstrate with the numbers and the additional disclosure we provided, we’ve actually have a very nominal increases in costs there because we’ve run the business very well. We’ve been very prudent in our underwriting and our processes. And the put-backs that we have relative to the size of our book is actually quite small and manageable.

So, we’re very comfortable with the profitability and the way we’re pricing right now.

Matthew O’Connor – Deutsche Bank AG

Well, I guess, let me frame that another way. The cost of the servicing for most of your competitors has gone up quite a bit, so I think they need to find a way to try and reprice that over time. So, there could be some benefit for you. I mean, just in general, it feels like the servicing business for the industry wasn’t priced for what we’re seeing now in terms of the costs and the burden.

Andrew Cecere

I don’t disagree with you, and I don’t disagree with the fact that, that maybe a benefit to us given the way we run the business.

Richard Davis

Yes. I’m glad you concluded that, because I think it’s actually a net positive if we continue to stick to [inaudible]. So, we’re going to see as a positive to a neutral.

Matthew O’Connor – Deutsche Bank AG

Okay, thank you.

Richard Davis

Thanks, Matt.

Andrew Cecere

Thanks, Matt.

Operator

Your next question comes from the line of Heather Wolf with UBS Securities.

Heather Wolf – UBS Securities

I understand you guys don’t want to make any guidance forecast going into 2011. But can you at least give us a sense for maybe the dollar value of securities that are coming due in 2011? And what kind of reinvestment risks you’re seeing currently?

Richard Davis

Heather, so the way I’d answer that question is I would expect our securities book net to grow a few billion dollars in 2011, so nothing significantly material. We’re on a $49 to 50 billion book. It’s going to grow up a few billion dollars.

We’re putting on – the majority of what we’re putting on are floaters versus fixed. And as I talked about that five to 10 basis points going to next quarter that’s part of the reason for the decline. But it won’t have a significant material impact on neither the balance sheet nor the net interest margin as we see it today for 2011.

Heather Wolf – UBS Securities

So, you don’t think that the existing portfolio poses much reinvestment risk, given where 10 years are today?

Richard Davis

Well, it does post some reinvestment risk. But given the size of what’s was rolling off versus we’re putting on, it doesn’t equate to a large number for 2011.

Heather Wolf – UBS Securities

And what’s rolling off is not rolling off at substantially higher yields than what you can find in the marketplace today?

Richard Davis

It is, Heather, as you know. But again, given the level of the roll-off and we’re reinvesting, the math there just doesn’t create a huge difference.

Heather Wolf – UBS Securities

I see. So, you’re just making it up in volume?

Richard Davis

Yes.

Heather Wolf – UBS Securities

Got it. Okay, thank you.

Richard Davis

You got it.

Andrew Cecere

Thanks.

Operator

Your next question comes from the line of Paul Miller with FBR Capital Markets.

Richard Davis

Hi, Paul.

Paul Miller – FBR Capital Markets

Yes, thank you.

Andrew Cecere

Hey, Paul.

Paul Miller – FBR Capital Markets

Hey, how you guys doing. On increased loan demand, there has been some story that I think the Fed released a report saying that for the first time, they’ve seen banks ease their credit standards.

Can you add some color around that? How do you ease your credit standards, which has increased your loan demand out there, which helped you grow your balance sheet this quarter?

Richard Davis

I’ll let Bill answer, but absolutely, no. Go ahead, Bill. Knock yourself out.

Bill Parker

Yes. Yes, I mean our underwriting standards haven’t changed since 10 years ago. But I think when they site things like that, what they’re talking about is when you go on to the down cycle, what used to be maybe a five-year revolvers for investment-grade credit collapse back to one-year and three-year revolvers.

Now, they’re going back out to five years. That’s some of the things they’re talking about when they talk about that "easing." So, that’s not –

Paul Miller – FBR Capital Markets

Okay.

Bill Parker

For us, it’s not an underwriting issue.

Richard Davis

Hey, Paul, it’s Richard. I also think that you will see – because the regulators are so keen on watching for quality, I think the only thing you might see is pricing issues, where some are going to be hungrier and take some risks on either pricing, and maybe even whole levels. But the regulators are very much on top of this. And by the way, we’re all welcoming that because we’d rather that they are giving us current feedback than a late feedback.

So, I think you’ll find any changes or adjustments will come in pricing, much less than in underwriting.

Paul Miller – FBR Capital Markets

Did you hear a lot of stories about like people that need credit can’t get credit, and people that don’t need credit have all the credit in the world. And I’m just wondering, we’re starting to see people always talk about loan growth and is the first time we’ve seen it. Is that things now losing up a little bit in the world, including for you guys, not necessarily underwriting standards, but much more willing to lend out there.

Richard Davis

Yes. So, it’s not either though. We’re not getting any standards. I don’t think the industry is changing its willingness to lend either. I think it’s a slow but predicted outcome that some of the customers, who restructure the way they live, both consumers, small businesses and large businesses and large corporate, they’re now becoming more qualified because they’ve done all the heavy lifting of getting themselves back in shape to now incur more debt and we’re more attracted of them because they don’t have those kinds of risks.

So, it’s really more of that, more qualified people and those who became more qualified by their good efforts in the last couple of years. A long recession is something we’re all trying to figure out how to live within and among, but it helped us get more clarity around those who took early actions and are now getting more prepared for a better future.

Paul Miller – FBR Capital Markets

Hey, thank you very much, gentlemen.

Richard Davis

Yes. Thanks, Paul.

Operator

Your next question comes from the line of Mike Mayo with CLSA.

Richard Davis

Hey, Mike.

Michael Mayo – CLSA

Good morning. First on Basel III, are you running Basel II right now? And how many more quarters until you can go off running parallel, assuming you are on parallel?

Richard Davis

Mike, we are running the Basel I and reporting on Basil I today. We would enter our parallel run in 2011. The numbers I’ve given you are Basil I, with Basel III rules applied.

When you think about Basel II, with Basel III rules applied, they actually would be better than the ratios that I’ve showed you of 90 to 100 basis points.

Michael Mayo – CLSA

So, if you were on parallel in 2011, maybe the ball goes bright in 2012, you could get off running parallel?

Richard Davis

That is the typical plan for the parallel run on this fourth quarter. It’s correct. And while we begin in January 1 of ‘11. So, we’re – remember we weren’t $250 billion at the beginning of the Basel activity, so we had to opt-in a few years ago when we hit the $250 billion. So, we’re ready to roll in January.

Michael Mayo – CLSA

Okay, and a far as the eventual target, you said you needed to make sure that, that the rules were which makes sense. But would that mean you have to wait until the U.S. decides on what the minimum ratios are which could be another year or so?

Andrew Cecere

I guess the answer is whatever the Fed decides, right? So, the Fed will along with the Treasury will decide what to the U.S. answer will be to all of the requirements and Basel. And once they decide what qualifies in terms of where the buffers went it, where the systemic important companies would be charged, that’s what I’m waiting for.

And so, I’m not even trying to figure out what America is going to do. I’m just waiting for the American response to whatever the G20 says and counting on people like the Treasury and the Fed to be thoughtful enough to let the banks that have shown and proven themselves to be ready to do that to get on and move on with that dividend.

Michael Mayo – CLSA

Okay. And then separately, loan utilization. I guess 26%, that’s still the all-time low, isn’t it?

Andrew Cecere

As long as –

Richard Davis

Yes.

Andrew Cecere

We recorded it is, yes.

Richard Davis

It is, yes.

Michael Mayo – CLSA

On the one hand, we have an all-time low on loan utilization. On the other hand, you’re growing loans a little bit more.

Richard Davis

Right.

Michael Mayo – CLSA

And we’ve been hearing this from – everyone’s kind of cautiously optimistic. Would you call yourself still cautiously optimistic? Or is this the real deal? We’re getting loan growth back and it’s going to take off?

Richard Davis

We’re definitely cautiously optimistic because I do think we’re starting to see the first glimmer now. One quarter doesn’t in turn make void. It’s a lot better than having to continue decreases.

For us, a flattening utilization is exceptionally exciting because if our loan utilization – remember we just do wholesale. So, a lot of banks have high utilization levels, they have seen credit cards and consumer and all that. This is wholesale for us.

Just in absolute dollars and as Andy mentioned in the call, we’re down $3 billion on wholesale commitment adjustment; just the same outstandings being used less. So, those commitments start to kick. That’s on top of the growth that you’re seeing today. Because as you said, were not getting it from utilization. We’re getting it from old-fashioned new customers and new growth.

So for us, we’re quite optimistic that this can get much lower, and it will be the first thing we’ll see as a consistent behavior, people are starting to use our balance sheet again over themselves trying to find everything.

Michael Mayo – CLSA

And then just one last question, a more general question. So, your revenue growth target is 7 to 8%. What would you need in the environment before you could achieve that sort of revenue growth target?

In other words, I imagine 10-year rates, wherever it is right now, 2.55% is not going to do it. What kind of normal environment would you need before you could realistically say you might be able to get that sort of revenue growth?

Andrew Cecere

I think you said – Mike, this is Andy. I think you said it correctly via normal economic environment, so normal GDP growth maybe 3 to 4%. Normal long-term rates or normal yield curve and finally, normal levels of unemployment backed down to the eights. So, this isn’t the environment that we’re going to achieve that because we’re not seeing a loan growth because yields are – the low [ph] at the long end is very low.

But when we get to that normal environment, same-store sales, spend all those things get back to normal economic levels that’s when we could achieve that.

Michael Mayo – CLSA

Just one quick follow-up there. If you have 4% GDP growth for over the long term, how do you get from 4% GDP growth to 7 to 8% revenue growth?

Andrew Cecere

By a couple of things, pricing and taking share.

Michael Mayo – CLSA

All right. Thank you.

Richard Davis

Sure. Thanks, Mike.

Operator

Your next question comes from the line of David Konrad with KBW.

Richard Davis

Hi, David.

David Konrad – Keefe, Bruyette, & Woods, Inc.

Hey, good morning. Just really a follow-up to Matt’s question on [inaudible] I guess more specifically the servicing. I mean if the bulk of your market share came kind of relatively recent phenomena, would it be fair to assume that the advantages and the servicing portfolio are relatively recent rather than kind of driven by a ‘05, ‘06 period?

And just wondered if you have any comment on exposure to private label servicing, if there is any?

Andrew Cecere

Second question first, no exposure to private label. Our vintages have actually are pretty steady stream. If you think about it, we’ve been growing throughout the years as Richard mentioned.

One of the reasons we’ve moved up the ranking is people are no longer the list. So, I want to say we have a waiting one way or the other it’s fairly linear.

David Konrad – Keefe, Bruyette, & Woods, Inc.

Okay, great. Thank you.

Andrew Cecere

Sure.

Richard Davis

Thanks, David.

Operator

Your next comes from the line of Matt Burnell with Wells Fargo.

Richard Davis

Hi, Matt.

Andrew Cecere

Hey, Matt.

Matthew Burnell – Wells Fargo Securities, LLC

Good morning, guys. Just a couple of quick questions.

On slide 29, taking a look at the home-equity delinquencies, they are up a little bit quarter-over-quarter. Is there any color you can provide on that? Or was that largely expected?

Richard Davis

Yes, I mean, believe it or not, there is seasonal patterns to the home-equity. And the seasonal increase this year was down substantially from last year and the prior year. So, it’s been trending down, so very comfortable with the outlook there.

Matthew Burnell – Wells Fargo Securities, LLC

Okay.

Richard Davis

It’s [inaudible] to also say, it’s one of our best portfolios. When this thing is all over, pull it back and with herald fewer portfolios in the quality of our home-equity portfolio. So, I’ll also give it a bit of a pass because it’s a very low level and I think the movement is pretty small.

If we saw an upward trend over a couple of quarters, I might start to worry. But I think it has past the hundred – there’s a high-water mark fast and you’re going to see it steady out here for a while.

Matthew Burnell – Wells Fargo Securities, LLC

Okay. And then just a second question on net interest margin. What assumptions are you all embedding in your assumption for fourth quarter NIM in terms of loan growth?

Richard Davis

Similar what you see here in the third quarter.

Matthew Burnell – Wells Fargo Securities, LLC

Okay. So, basically no ramp-up in loan growth?

Andrew Cecere

Correct.

Matthew Burnell – Wells Fargo Securities, LLC

Okay, super. Thanks very much, guys.

Andrew Cecere

You bet.

Matthew Burnell – Wells Fargo Securities, LLC

Thank you.

Richard Davis

Thanks, Matt.

Operator

Your final question comes from the line of Meredith Whitney with Meredith Whitney Advisory Group.

Richard Davis

Good morning, Meredith.

Meredith Whitney – Meredith Whitney Advisory Group

Good morning. I have a little bit of an unorthodox question, when I still and speak to the much smaller banks that will be below the radar screen for any type acquisition, they obviously are very challenged by the cost of regulatory burdens. And I’m wondering what opportunities want to have as banker’s bank, what you can do for the smaller community banks and how that may provide a growth opportunity for you that doesn’t – you’re not seeing in betweens, so you’re seen as more of a friend than necessarily large competitor?

Richard Davis

Yes, I like that question. We have got over 2,000 banks that we are – the bank too and a number of significant ways. And what we’re doing know is we’re trying to go back to them and talk to them about their cost structures and telling them that if they want to give us their credit card portfolio and let us private label. If they wanted to give us their corporate payments business and give them something they don’t have that they want to handoff to us, some of our correspondent banking capabilities.

We can help them reduce their cost structure. We can take the scale, we enjoyed and both of us can do better by performing something like that. Also the servicing ATM machines, we’re finding a lot of interest.

And so, if I was a small bank, I’d say look, “If I’m going to make it and I want to get my cost structure down, I’m going to have to go somewhere or I might have not gone before and let someone I trust do that for me on a wide label basis and therefore, I can go out and have some of the stress and revenue side until I can get to the other end of the recession.”

So, actually it’s a quite – you’re very – it’s not unorthodox. It’s a great question and we see this as a very positive. I thought you were headed to small banks being available for sale and this is actually, in our case, a more attractive because it’s got long and permanent approach to it.

Meredith Whitney – Meredith Whitney Advisory Group

Sure. And is that something that we’d be able to see the growth structure? Is that something that’s going to be material to earnings? Is that going to be a growth channel that’s going to be meaningful to investors?

Richard Davis

The corresponding banking business for us is very big and because it’s already big, it doesn’t move a lot in terms of volume to show it. But to the extent that that’s – that’s a really good idea. I think I’ll introduce something in our next presentation to give you guys a sense of where it is today and then, we can use that as a measure to track because I’m expecting that to be one of our growth initiatives as you just cited. So, we’ll have that.

Meredith Whitney – Meredith Whitney Advisory Group

Okay, terrific. Thank you so much.

Richard Davis

Thanks, Meredith.

Andrew Cecere

Thanks.

Operator

At this time, I’ll turn the call back to management for any closing remarks.

Judith Murphy

Thank you, all, for listening to our review of the quarterly results. And please, if you have any follow-up questions, feel free to call us in Investor Relations.

Richard Davis

And this is Richard, let me thank you for your attention to our call. We are standing ready anytime you have any questions. We are transparent and you know that, and we’re only hesitating sometimes because the environment we’re in would cause us to make mistakes by trying to guess too far forward.

But I think you’ve just heard a very consistent, predictable, repeatable story. And as much as it may not be that exciting, because it doesn’t have a lot of unexpected outcomes, it is a one that we’re proud of and we’re excited to tell the story. So, anytime, give us a call. Thank you.

Judith Murphy

Thank you.

Andrew Cecere

Thanks.

Operator

This concludes today’s U.S. Bancorp’s Third Quarter 2010 Earnings Conference Call. You may now disconnect.

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